The Stock Market is affected by the Business cycle
The stock market has a 36-year cycle that is extremely sensitive to the 9-year business cycle, and is affected by the expansion-recession periods of that cycle. The stock market is also affected by an overall “secular” cycle. The overall cycle has a length of 36 years and two components: an 18-year period of flat or level (secular bear) performance, and an 18-year period of steadily increasing (secular bull) performance that reaches the next “level” value. We are nearing the end of the current secular bear phase of the current stock market super cycle, where the overall stock market is bottoming out (the “trough” of the cycle).
The current Business cycle is nearing the end of a long run of positive GDP growth, and since the definition of a recession is consecutive quarters of negative GDP growth, we have successfully avoided a recession for almost 10 years (the Great Recession ended in 2009). Since the last recession ended in 2009, and the business cycle is 9-years long, I would expect the next recession by 2018. This means that the current business cycle is bottoming out at the same time that the current stock market super cycle is bottoming out.
Joseph Schumpeter stated that there are definite investment cycles that correspond to the four stages of a sinusoidal wave. These four stages constitute the typical nine-year business cycle, which has been shown to exist with “considerable regularity.” He also emphasized that when the peaks or troughs of these different cycles synchronize, the effect is amplified to make things much better – or worse: “…the coincidence at any time of corresponding phases of all three cycles will always produce phenomena of unusual intensity, especially if the phases that coincide are those of prosperity or depression.” [1]
What does this mean for the Stock Market? It means that the next bear market, which I expect to occur by 2018, could be very severe indeed.
[1] Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, by Joseph A. Schumpeter, 1939, McGraw-Hill, New York, New York, page 173
